Bilateral trade agreements come in handy

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: The recent flurry of bilateral and regional trade agreements bring the issue of multilateral versus bilateral trade agreements to the forefront in a fundamentally shifting global economy. Some of the recently concluded agreements are Japan-Thailand and US-South Korea free trade agreements (FTAs). Japan has shown an interest in FTA with the US in response to the US-South Korea agreement. There are 220-odd such agreements in existence today and it is expected to scale up to 400 by the turn of this decade.

Meanwhile, let us step back to understand the role played by such agreements in fostering freer global trade in a globalising world. With the establishment of Global Agreement on Trade and Tariffs (GATT) after World War II, the multilateral approach was the preferred mode of trade liberalisation. The World Trade Organisation (WTO) was brought into existence on January 1, 1995, after GATT to fix the anomaly resulting from special treatment allowed under GATT for its member nations to subsidise agriculture, domestic production and export, and limit market access.

This practice ultimately resulted in a decrease in commodity food price, distortion in global agriculture trade and frustration from non-subsidised agriculture exporting nations. One of the noble objectives of WTO was to eradicate this trade distortion, and improve food price and thereby improve the welfare of farmers.

The Uruguay Round launched during 1986-94 (most of WTO’s work comes from there and the earlier GATT) touched issues ranging from agriculture, IPR, technical barriers and trade. Since, the agreement on agriculture was just an interim agreement while the final goal was full liberalisation, it was agreed that negotiations would resume in 1999. Eventually, new negotiations were launched by the organisation under the Doha Development Agenda in 2001.

One of the thorniest issues dividing the developed and the developing world is the issue of agriculture subsidy even though its share of the world trade is less than 8%. Due to the deadlock in negotiations, the discussion was brought to a halt in July 2006—until the recent meeting of the US, EU, Brazil and India in Potsdam, Germany in June 2007. However, post that meet, the discussions have halted again. Discussions may only resume after the US presidential election next year.

With globalisation comes the possibility to buy and sell goods and services anywhere in the world. If this is left to market forces alone, it can create distortions in development patterns. To harness the true benefit of globalisation, there was need of an organisation that represents all societies and ensures that both developed and developing countries benefit equally in the era of globalisation. Hence, WTO was formed on the basis of the multilateral trading system. While no one denies the benefits fostered by existence of such a multilateral trade agreement, in reality, it has been difficult for the developed and developing countries to agree on the end game.

A direct consequence of slowdown in the Doha round was resurgence of regional trade agreements in the form of FTAs and bilateral trade agreements. FTAs, many of which are bilateral, are arrangements in which countries give each other preferential treatment in trade by eliminating tariffs and other barriers on goods. Each country continues its normal trade policies with other countries outside the FTA agreement.

One of the advantages of bilateral agreements is that countries can choose when to enter into agreements. The US and Canada were ready to start the FTA process in the mid-1980s. Mexico followed a few years later and the US—Canada FTA was folded into NAFTA. A US-Korea FTA would not have been doable 10 years ago. Regional or bilateral trade agreement also has an advantage over WTO in dealing with intractable trade problems than does WTO, which usually must cater to the lowest common policy denominator.

In theory, the global trade agreement is supposed to be an ideal solution in terms of resource allocation, economic welfare and economic prosperity. The next best solution is the regional trade agreement that lowers the trade barrier amongst members without having to lower barrier for non-members. However, systemic issues such as rules of origin, anti-dumping and subsidies are best left to be resolved as multilateral trade agreements.

WTO supports existence of such regional agreements as long as they are transparent and help deepen trade and economic liberalisation without raising the trade barrier for non-members or if such agreements create a way for trade diversion resulting in imports from an inefficient supply base. There are many reasons for the momentum of regional trade agreements to have picked up in recent past.

Regional agreements also help developing countries to experiment with domestic reforms, regulatory policies and to provide an opportunity for domestic market to learn how to cope with limited foreign competition before a full onslaught in a multilateral regime.

A developing country negotiating such an agreement with a developed country can also expect non-trade preferential benefits such as development assistance and freer market access and gain a point over other competing WTO members.

It is well known that Asia has emerged a key player in the global trade ecosystem. The World Bank expects global economy to grow at a much faster pace in the next three decades as compared to the previous three as large developing countries such as India and China witness high growth and integrate with the rest of the world at an unprecedented pace. Their share in the global output of the developing countries is expected to increase from the present fifth to a third in the next 25 years.

While integrating with the global trade and production system, Asian economies have also deeply integrated regionally. Intra-regional trade in East Asia makes 55% of the region’s total trade that is up from 35% back in the 1980s.

As compared to the US and Europe, Asia was a latecomer in the pursuit of regional trade agreements or FTAs as an instrument for trade policy. Asean was the only significant regional trade pact in existence before 1998. Since then there has been a dramatic proliferation of FTAs and there are more than a dozen in existence in East Asia today and twice that number is already under negotiation.

This was also a result of dissatisfaction with the progress on global trade talks and the ‘left behind’ syndrome. Regional trade agreements and FTAs have kept the torch of trade liberalisation burning in spite of breakdown in discussions on the global trade agreement. This is of paramount importance as the world enters into a paradigm shift in its trade pattern, while protectionist sentiments are expected to strengthen further.